Large Depositors May Soon Taste Risk

Bank Reformers Want To Curtail Fdic Insurance

February 10, 1991|By DAVID RESS Staff Writer

The insurance on America's bank deposits, some economists say, is way too generous. That's why many see the type of reforms the Bush administration is urging - reforms that basically tell depositors to keep a sharper eye on their money - as steps in the right direction.

Economists like Charles Meiburg, of the University of Virginia, say such a rollback would ease the strain on the Federal Deposit Insurance Corp., which the House Banking Committee has said could run out of cash if the recession continues. All of Virginia's banks and savings and loans are insured by the FDIC.

Meiberg doesn't think the cost of Brady's proposal is all that high. ``Anybody with $100,000 should be able to live with a little risk,'' he said.

Meiburg said the Bush proposal, which would limit insurance coverage to $100,000 per person for retirement accounts in a single bank and $100,000 for all other accounts in the same bank, is more generous than many economists thought necessary.

Many had urged even sharper cuts. Proposals circulated within the Treasury had called for a cap of $100,000 per person spread over all accounts in all banks.

The administration proposal would still be a reduction from current coverage. Now, for people who know how to play the complex deposit insurance game, the FDIC will insure up to $700,000 between two people and $1.6 million for a family of four, including retirement accounts.

If the Bush proposals are adopted by Congress, Meiberg said, consumers will have to become a little more careful.

And that could be good for banking, he said.

If consumers start looking at bank's balance sheets before deciding where they'll put their money, bankers are going to have to start paying attention, too.

Meiburg - and a host of other economists - thinks that kind of attention is precisely what American banking needs these days.

Stanford University economist Kenneth E. Scott thinks deposit insurance allowed some savings and loan executives to run hog wild in the 1980s, investing in anything from Old Master paintings to empty office towers, secure in the knowledge that their obligations to depositors would always be met - by the FDIC.

He thinks that's not healthy.

If bankers want to take big risks, they should be using money from people who aren't afraid of taking big risks, too, said Scott. If they're going to use insured money - especially if it's insured by taxpayers through the federal deposit insurance system - then bankers should be investing that money securely.

That kind of thinking - even more than worries about the FDIC's liquidity - is why deposit insurance changes are such an important part of the Bush administration's banking reform plan, economists say.

What the administration is worried about is the capital base of American banks.

It's been falling, mainly because of the massive reserves banks have had to set up, beginning in the mid-1980s, to cover bad loans made to oil drillers, Third World countries and real estate developers.

Capital is the money that's is invested in a bank. Some comes from selling stock. Some is money the bank has reinvested in itself from its profits.

If it doesn't have enough capital, a bank can't guarantee that depositors can get their funds when they want them. When a bank is in that position, it has failed.

Then the federal government will take it over and either sell it to another financial institution that does have enough capital to honor commitments to depositors, or reimburse depositors itself through FDIC.

A quick and easy capital test, economists and bank analysts say, is to look at a bank's stockholders' equity, which is reported at the bottom of its balance sheet, and divide that figure by its total assets, which is reported at the top. The bigger the fraction, the sounder the bank.

Multiplying the result by 100 expresses the ratio as a percentage -a percentage the federal government says must exceed 5 percent for banks and 3 percent for savings and loans.

Caryl Austrian, a spokeswoman for the FDIC, said there's an easier way for consumers to reassure themselves that their savings are safe.

``Just make sure your accounts are set up so you don't have more than $100,000 in any one institution,'' she said.

If depositors want to keep more than $100,000 in one bank or savings and loan and have full insurance coverage, they need to be careful about the ownership of their accounts, said Charles D. Edmonson, senior vice president at Newport News Savings Bank.

First, tax-deferred retirement accounts like Individual Retirement Accounts or Keogh plans are insured separately from any other accounts a depositor may have, he said. These retirement accounts are insured up to $100,000 per person.

Couples can get up to $200,000 of coverage if each maintains separate IRA or Keogh accounts in his or her name.